22 Jun 2015

Criticizing Robert Reich’s Video for a $15 Minimum Wage

Economics, Minimum wage, Shameless Self-Promotion 46 Comments

At Mises CA. An excerpt:

Reich then goes on to argue that if the minimum wage in 1968 had kept pace with the growth in the “average productivity” of American workers, then today it would be more than $21/hour. Although Reich doesn’t come right out and say it, he sure implies that the workers on the bottom rungs are really getting screwed, that they are producing $21/hour of output for their bosses and yet only getting paid $7.25/hour (the current federal minimum wage).

Is this remotely plausible? Surely someone who was the Secretary of Labor can’t possibly be this ignorant of how competitive labor markets work?

To give a hint, those “average productivity” figures work by taking total GDP and dividing by the number of workers. So hypothetically speaking, if developments in fracking technology allowed the same number of workers to produce more oil, then “average productivity” would go up. In terms of marginal productivity analysis, this would obviously mean increased rents for the owners of land (which had large mineral deposits), and lesser increases in the earnings of specialized drilling equipment and high-skill workers with experience working in oil fields. There would be no reason at all to expect the statistical increase in “average productivity” to correspond to the same jump in “average wages,” let alone the average wage among unskilled workers.

46 Responses to “Criticizing Robert Reich’s Video for a $15 Minimum Wage”

  1. Andrew_FL says:

    “Surely someone who was the Secretary of Labor can’t possibly be this ignorant of how competitive labor markets work?”

    Actually, I think that’s a job requirement.

    • khodge says:

      Besides, since he’s teamed up with MoveOn.org, it’s got to be right.

    • E. Harding says:

      Totally. He doesn’t even know AD is a nominal variable, not a real one. He also doesn’t know about the existence of profits.

  2. Gil says:

    So either people were way more productive in 1968 or there was a worker shortage.

  3. E. Harding says:

    Three words: President’s Re-Employment Agreement. The Wal-Mart of the day was strongly against it, and rightly so.

    BTW, the most we can do is obviously Soviet Communism (as far as I’m aware, the most successful kind).

    • Andrew_FL says:

      I dunno modern day Chinese communism seems to be doing better than Soviet communism ever did.

      And sure you could say modern day Chinese communism isn’t “real” communism, but you could say that about any of the varieties of Soviet communism post-NEP.

      • E. Harding says:

        The NEP probably wasn’t real Communism, either.
        Also, modern China is much more inequitable than the Soviet Union in the 1980s. And modern China’s economy certainly doesn’t look very Communist.
        The Soviet Union collapse coincided with a great depression (although with a vast increase in the diversity of imports and services), and much of the boom in the 2000s was simply making up lost ground. This suggests at least Russia during late Soviet times was more economically developed than China today.

  4. E. Harding says:

    :=) Comments are disabled for this video.

  5. E. Harding says:

    BTW, the coverage of the minimum wage changed throughout the 20th century:
    Also, AHETPI in 1968 was $3 per hour. So the 1968 minimum wage would be as burdensome as an $11 one today, not a $15 one (AHETPI today is $21).

  6. E. Harding says:

    Also, you could totally use a $50 minimum wage argument against Reich (note the highly apt nature of the last name).

  7. E. Harding says:

    Fight for $50!

  8. E. Harding says:

    Also, Reich’s reasoning contradicts literally every New (i.e., non-) Keynesian (alternatively, Old Krugmanian) sticky-wage model of unemployment.

  9. Andrew_FL says:

    Reich’s revival of the High Wage Doctrine is probably the most interesting aspect of all this. Truly it is necessary to beat the dead horses in economic theory even when they appear lifeless, lest they spring back to life again.

    • E. Harding says:

      Andrew, you’re excellent with these aphorisms.

      • Andrew_FL says:

        While I could not dispute that what you say is true in general I’m actually paraphrasing from a footnote of a paper by George Selgin on the topic of the Real Bills Doctrine.

        And by paraphrasing, I mean I basically rearranged the order of the main clauses.

        For some reason whenever I’m actually praised for an idea it’s not one of my own.

        • Innocent says:

          Well don’t take it so hard at least you have the integrity to give credit where it was due. I actually liked it a lot as well. Thanks for the link.

    • Tel says:

      Every economist calls every other economist a “dumb zombie”, it’s kind of partway between an in joke and a secret handshake.

      Mind you, riding into a major conference on a skeletal horse would be pretty freaking cool. The only step up after that would be summoning a full zombie army, preferably dressed in Civil War paraphernalia.

      • Carl says:

        Right, there are plenty of economists who think that the disemployment effect of a minimum wage is a “zombie” idea. It feels good to portray oneself as the frontier thinker slaying zombies though. Do it with weary resignation for extra smug points. “Sigh, here we go again, didn’t we already crush this idea 50 years ago” etc

  10. Major.Freedom says:

    Total wages and salaries of all private industry workers, according to St. Louis FRED, was approx. $7.5T at end of 2014.

    Number of full time non-farm employees was approx. 140M

    $7.5T / 140M = $53,500 per year per worker.

    If average full time worker works 40 hours per week for 50 weeks per year, that translates to:

    $53,500 / 40 / 50 = $26/hour.

    What is Reich talking about? Workers are ON AVERAGE making MORE than what his GDP based estimate implies is “fair”.

    • Bob Murphy says:

      I’m not saying it would totally blow up your approach, MF, but if we include farm employees and part-time workers, wouldn’t that drive your figure way down? I.e. the “total wages and salaries” presumably included part-time right? Not sure if it includes farm workers.

      • Tel says:

        Reich pretty clearly said that only full time employees deserve not to be poor (that was his number one point) and I shouldn’t need to explain this but he is rightful judge of what’s fair in this world.

        I agree with your conclusion about farm workers by the way… I dunno about them either.

        For what it’s worth, FRED gives median weekly earnings directly, and median is not slanted toward “the rich” it’s better representative of what real people earn.


        At 40 hours and $800 per week (not adjusted for inflation) we get about $20 per hour in today’s money.

        By the way, that’s one slick video, they must have got a cracking budget to put that together. Murphy, you should get those effects happening for your videos. Reich has a great little snappy sound bite technique happening too. Just as you are saying “Huh?” from his last point he’s already flipping over to hit you with something else. If I was one of those short attention span individuals I’d be really into it. Marvelous stuff, very impressive.

      • Major.Freedom says:

        I agree it would blow it up. Literally.

        If we include part time workers, the total number of hours worked during 2013 for both part time and full time workers, according to St. Louis FRED, was approx. 235B hours.

        $7.5T / 235B = $31 per hour.

      • Andrew_FL says:

        Okay so the series you guys want is CES0500000003 although it doesn’t go back to before 2006. Average Hourly Earnings for private employees is about $25/hr. MF was actually pretty close with $26/hr

        What I can’t figure out is where Reich gets a 13 fold increase in wages since 1968.

    • Andrew_FL says:

      Yeah the series you want from FRED is Average Hourly Earnings. Although if I recall the series that are available correctly, Reich must have done some Piketty-esque splicing of two different series that are not exactly the same thing.

    • E. Harding says:

      What about the full-timers, MF? And you’re ignoring inequality.

  11. skylien says:

    21 – 7.25 = 13.75$/h -> Wow so this must be monopsony power in numbers!

    If I had known that it is this high then I had opened one of those monopsony power firms myself and sell my soul to the dark side of the markets power. Should be no problem with this kind of margin to be profitable.. MuhahaaaHAHAA.

    • skylien says:

      I am not sure, are monopsony power abusing firms only producing evil stuff like arms, oil and Ron Paul buttons, or would it be ok to produce solar panels, yoga mats and rose-scented candles as well?

      I guess the first thing on my business plan should be building a money bin (of course I would hoard my profits only in physical gold, interest rates are at zero or even negative! No need to waste my own money..)

  12. Andrew_FL says:

    Argh woops me and my fat fingers on that last comment typing n instead of m and not realizing it.

    Bob, you see the comments that go to moderation right? Is there any way to fix that?

  13. Harold says:

    ” There would be no reason at all to expect the statistical increase in “average productivity” to correspond to the same jump in “average wages,” let alone the average wage among unskilled workers.”

    Is this not the very point that anti-capitalists are worried about? There is no reason at all to expect the majority to share in the increased wealth of the nation. There is no reason at all to expect that it will not all end up with the 1% top capital owners?

    • skylien says:

      There is no reason? What keeps the majority of becoming self-employed and reap the windfall profit in any business that uses MW-workers themselves?

      • Harold says:

        I am quoting Bob. Presumably he could not think of a reason.

        • skylien says:

          Well, he just said, there is no reason that a change in statistical average productivity has to cause the SAME change in average wages.

          But you said there is no reason the majority could share in ANY of the increased wealth.

          This is not the same thing, is it?

          • Matt M says:

            Also, why the myopic focus on wages?

            Presumably, productivity gains could be “distributed” to the average or lower-class worker though quality of live improvements that aren’t reflected in nominal wages.

            To suggest that all the gains of increasing productivity have gone to the rich is to suggest that today’s poor are no better off than they were 50 years ago. But is Reich suggesting any minimum wage worker would rather live 50 years ago than today? Nonsense.

        • Bob Murphy says:

          Guys guys guys. When I said there is “no reason” I am referring to the specific example I gave.

          So generalizing, if “average productivity” goes up for reasons that have nothing to do with workers, then we wouldn’t expect wages to fully absorb the increase. E.g. if someone strikes oil in his backyard, most of the gain will accrue to the guy who finds the oil, not a kid flipping burgers in McDonalds. I don’t see why that is so scandalous.

          (To be sure, that kid *will* see his standard of living go up, because gas will be cheaper etc. But there’s no reason that every increase in output since 1970 should have gone to hourly workers and none to other people.)

  14. skylien says:

    I think it is interesting that Reich uses 1968, just 3 year before the gold window was closed, as his reference point. The way productivity is calculated (by means of GDP) which is boosted and boosted as much as possible by blowing one bubble after another, in way which would not have been possible pre 1971, by artificial means through the central bank and government is bound to give very misleading numbers.

  15. anon says:

    “I hope Reich would admit that if a worker shows up for 40 hours a week, but does nothing except swear at customers and light inventory on fire, that the employer is allowed to fire the guy and pay him $0.”

    What, and have the American taxpayer spend billions on public assistance to subsidize the employer for those $0/hour wages? Even people who swear at customers and secretly augment the guacamole have to eat.

    Reich has opined about full employment and manna-from-heaven jobs in the past, so presumably he believes that workers who would be net negatives at $0/hour, still deserve a living wage for their efforts. Alternatively, he’s just leading a populist parade because he knows that the party faithful won’t punish him for advocating that someone else pay for his worker’s paradise.

  16. Major.Freedom says:

    Reich’s flawed argument that raising the minimum wage to $15/hour won’t reduce employment is something Henry Hazlitt corrected way back in the 1930s in his Economics in One Lesson, in the chapter “Enough to buy back the product”. It is remarkable how the same flawed arguments are being peddled by those who should know better.

    It is not true that raising minimum wages will increase employment in the way Reich describes. First, with a higher price floor, contrary to Reich’s presumption this does not automatically mean every worker currently earning the minimum wage will see a wage rate increase. Artificial price floors above the market rate reduce the quantity demanded in the market. Second, even if for some miraculous reason those with government guns knew more about the market rate of workers than the workers and employers themselves, and pointing guns at them suddenly injected them with heightened wisdom about what wage rates ought to be, then it is not the case that this will boost employment by “putting more money in people’s pockets which then gets respent on the products of business which then boosts jobs”. As John Stuart Mill knew more than 160 years ago: the demand for commodities is NOT demand for labor. The demand for commodities is in fact in competition with demand for labor.

    Reich seems to have not even considered where the money that went to the wage payments came from. It of course came from employers! If employers are forced to pay more wages, and then those wage payments are then spent on the production of employers, how in the world does this additional wage payments and then additional products payments, boost employment? It doesn’t. Instead of $10 leaving an employer’s hands and then having it returned to him in the sale of goods, leaving him with zero net additional ollars, there is $15 leaving his hands and then returned to him in the sale of goods, leaving him with the same zero net additional dollars.

    The actual net effect of an increase in wage payments, regardless of the cause, would be a reduction in spending on capital goods, which when contrasted with the additional spending on consumer goods will reduce the quantity of capital goods that workers use and thus reduce total productivity throughout the economy which reduces REAL wages, even with the higher nominal wage payments, totally opposite of the intended effect (or is it?), or, there will be a reduction in the incomes of employers, which after taxes averages only about 10%-20% of aggregate revenues.

    Even if, miraculously, the additional wage payments came ENTIRELY at the expense of employer incomes (which are a fraction of total dividends and interest payments), which would allow no reduction in spending on capital goods, this additional spending on wages when spread out across all wage earners would have their wages increase by just 10% to 20%. So a worker who used to earn $10 an hour would get $11 or $12 an hour instead.

    10%-20%. This. This is what millions of militia men, armed thugs, government armies, dictators, unions, socialists, and all anti-capitalists have killed people and destroyed cities over the last 150 years since the poisonous Marxism infected the world.

    It is tragic, infuriating, pathetic, and something I try not to think about but cannot help it when I see ignoramuses proselytizing on YouTube, preying on the credulity of the next generation of young people and brainwashing them into engaging in a continuance of self-destructive behavior.

    • Lee Waaks says:

      Is Reich among these hard-core communist types? Isn’t he a garden variety social democrat? Granted he would gladly imprison those who violate the MW laws, he doesn’t seem blood thirsty.

  17. Innocent says:

    I actually think that wage stickiness is part of the issue. Keynes brought it in BECAUSE of labor unions and such. Just as the belief that a new category of unemployment had developed it ironically seemed to develop at the same time as Unionization. Could wage stickiness and massive unemployment have had something to do with one another? More than likely. However rather than do the proper thing and let the market adjust wages we seem set on maintaining a ‘living wage’ and eroding purchasing power from the stand point of perpetual inflation rather than allow labor ( a commodity ) to be on the market just like everything else.

    Maybe I am wrong in thinking this, but I saw many companies who ‘made it’ during the last recession cut to the bone, get concessions from their employees, and made it through. This sort of gets rid of the idea of wages being all that sticky. In some cases I know people who dropped 50%, and are now back up to what they were plus a little. anecdotal I know but still…

    • Major.Freedom says:

      Wages are not sticky.

      Offering free money if one loses one’s job such that one does not have an incentive to reduce one’s among rate, is not wage stickiness.

      I don’t know of any employer or employee who would rather earn zero or negative income over a positive income that just so happened to be less than their recent income.

      • E. Harding says:

        But money/employer illusion.

      • Lee Waaks says:

        Here is Steve Horwitz on the “Who-goes-first problem”: “The question remains as to why Yeager and Greenfield believe prices are less than perfectly flexible. The broadest reason is a version of the Prisoners’Dilemma problem. In the classic Prisoners’ Dilemma game, each of two players is presented with a pay-off matrix that makes it in each one’s individual interest to choose a course of action that is collectively sub-optimal. The key is that the two players are unable to communicate with each other and thus
        coordinate their choices in a way to reach the optimal equilibrium. This lack of direct communication in the model makes it useful for describing some patterns of market behavior. In Yeager’s and Greenfield’s account, each individual seller would like to cut prices when faced with slackening sales, but none is willing to do so without some assurance that other sellers will do the same. Any seller who goes first in cutting the price of his output will face a price-cost squeeze if the sellers of his inputs do not also cut their prices. If
        each seller could be assured that every other seller would cut prices, then each would be willing to do so. However, without such an assurance, cutting prices is a bad move. No matter which strategy the other sellers choose, each individual seller sees it in his interest not to cut prices. The result is therefore sub-optimal; no one cuts prices when everyone should. Complicating this is the fact that individual buyers and sellers are normally unable to diagnose the source of the slackening demand. One line of response to the Prisoners’ Dilemma argument is that monetary disequilibria are not
        single-play games, rather, they recur with some frequency. Game theoretical arguments show that in repeated Prisoners’ Dilemma games, players can find ways to reach a Nash equilibrium. So perhaps monetary disequilibria have those characteristics. Unfortunately, businesspeople normally do not concern themselves with the sort of global knowledge that might indicate the presence
        of monetary disturbances.”

        • Harold says:

          In Bob’s recent (and very interesting) post on game theory, or at least the links to previous things he had written, he made the point that the Nash equilibrium in repeated PD with a limited number of rounds (say 1000) was to defect even at the first round. This was because on the last round the players should defect to maximise winnings. Hence all ratrional players will do so. SInce we know the opponent will defect on the last round, the last but one round becomes the one we know we should defect on to maximise winnings. And so on back to round 1.

          Players can and do reach a better solution, where they reap the rewards of multiple cooperations. His point (I think) was that this was not the Nash eqiulibrium.

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